Risk & Compliance

Setting Standards for the Standards-Setter?

Congress looking to take more control over FASB; SEC reportedly not pleased. Plus: Enron/Andersen deal with shareholders unravels, and how high wil...
Stephen TaubMay 2, 2002

Is the Financial Accounting Standards Board’s independence in jeopardy?

Congress is mulling a bill that would require FASB to meet certain conditions by the Treasury Department and Congress to continue to receive its funding, according to Reuters, citing a discussion draft. FASB, which is mostly self-governing, has been under attack for being slow to rein in the types of accounting practices that brought down Enron Corp.

The bill is being developed by members of the House Energy and Commerce Committee. But it appears that regulators at the Securities and Exchange Commission are not happy with the proposal.

“Rather than ensuring FASB’s independence, the bill would further politicize the accounting standards-setting process,” SEC staffers reportedly stated in comments requested by the bill’s authors.

The bill could be introduced in the next few days.

Under the proposal, which could still be revised, the Secretary of the Treasury would annually impose and collect fees to fund FASB. The board currently raises money from selling publications and soliciting donations from accounting firms and companies.

That setup has led to criticism that accounting firms and corporations have too much influence with accounting standards-setters like FASB and the International Accounting Standards Board. As CFO.com reported on February 15, former Federal Reserve Bank chairman Paul Volcker (and chairman of the IASB’s foundation trustees), acknowledged that the international accounting standards group solicited a donation from Enron last year. Volcker conceded that former Enron chief accountant Richard Causey was interested in determining what kind of influence a donation would buy for Enron.

Volcker reported that the IASB requested $500,000. But Enron apparently agreed to give about half that sum—and never responded to an invoice. “I don’t think there’s been any undue influence,” said Volcker in February.

Under the congressional proposal, however, the Treasury would manage FASB’s account and give it an allowance to pay its bills. Also, FASB would report annually to the president, the House Energy and Commerce Committee, and the Senate Banking Committee.

Before FASB’s allowance could be disbursed each year, the Comptroller General would be required to tell the Treasury and the committee if the board was meeting independence and performance requirements. If the Comptroller General is unhappy with FASB’s performance, he or she would advise the board what it must do.

The bill would also require FASB to develop standards for off-balance-sheet accounting and special-purpose entities (SPEs), the investment vehicles that led to Enron’s bankruptcy. In late January, reports surfaced that FASB was already looking at the so-called 3 percent rule as part of its broad inquiry into SPEs. It’s believed the accounting rule-making body plans to make its proposals by June.

As you recall, the 3 percent rule enabled Enron to keep $2.6 billion of debt from three partnerships off of its balance sheet since independent investors contributed at least 3 percent of the partnerships’ funding. The feeling among accounting experts is that FASB will stress “control” rather than a specific investment percentage.

(Editor’s Note: For an exclusive profile of incoming FASB chairman Robert Herz, click here.)

Mark Down at Kmart?

More bad news from Kmart.

Yesterday, management at the bankrupt retailing giant said it will delay the filing of its annual report because it may restate its quarterly results for accounting reasons. Company management stated it needs additional time due to a possible change in accounting methodology, as well as “to reflect certain aspects of its previously announced investigation concerning various accounting matters.”

The company said the assessment and review relates to vendor allowances and rebates, as well as general liability reserves.

“I think we’re going to see some really big losses in a retrogressive manner,” Richard Hastings, an analyst at Cyber Credit, told one wire service. “I think it’s going to be pretty unpleasant.”

Back in January Kmart revealed it had received an anonymous letter expressing concern regarding unspecified accounting matters. The company did not provide any other details, however.

The letter, which was addressed to Kmart’s board of directors; PricewaterhouseCoopers, the company’s auditor; and the SEC, purports to come from employees of the company, Kmart management said in a statement.

Andersen-Enron Deal Collapses

It looks like the large civil lawsuits against Enron Corp. executives and Enron’s former auditor, Andersen, are going to trial.

A mediator overseeing settlement negotiations said talks have collapsed. “The mediation is terminated,” Eric Green, the court-appointed mediator, reportedly said.

According to one wire service, Green sent an E-mail to judges in the case. In it, he noted: “This is to let you know it appears we have not been able to successfully mediate this dispute. Despite the best efforts of all parties, unresolvable differences remain and we do not believe we can overcome them at this time.”

The settlement talks ended less than a week before Andersen’s obstruction of justice trial gets under way in a Houston courtroom.

Enron’s shareholders lost billions of dollars when the former energy-trading giant filed for bankruptcy in December.

The collapse in the talks also came on the second day of Andersen’s trial in Arizona. That trial stems from the accounting firm’s alleged role in the collapse of the Baptist Foundation of Arizona, a nonprofit organization that allegedly operated as a Ponzi scheme.

Short Takes

>> Tyco International Ltd. CFO Mark Swartz last week bought about $10 million worth of Tyco stock. Swartz scooped up 500,000 shares, paying between $19.80 and $20 per share. The trades took place one day after Tyco scrapped plans to split into four companies and reported a $1.9 billion loss. (To find out what’s behind Tyco’s restructuring plan, read “Deconstructing Tyco.”)

>> Barnes & Noble CFO Maureen E. O’Connell took home more than $1.6 million last year. She earned a $450,000 salary, received a $202,500 bonus, and realized gains of $960,000 from exercising options.

>> Look for health-insurance premiums to keep rising by double digits. Health-plan providers have proposed increases in the 21 percent area for 2003, up from 19 percent in 2002, according to UBS Warburg analyst William McKeever. “Employers will likely respond by shifting additional costs on to employees and through benefit buydowns although these changes will not likely be dramatic,” he added in a note to clients. But “employers have few options to combat the price increases.” When the contracts are signed and dry, McKeever expects the 2003 increase to be at least 15-16 percent, in line with 2002.

>> Moody’s Investors Service cut its senior unsecured long-term ratings of Xerox Corp. to B1 from Ba1. “Notwithstanding the financial and operational progress to date, the downgrades reflect Moody’s concerns about the level of free cash flow that Xerox’s core, non-finance business generates relative to the company’s debt level; large debt maturities over the next few years; dependence on capital market access to refinance debt obligations; and the need for continued cost reductions in the face of modest revenue growth prospects,” the rating agency said in a statement. Moody’s added that the ratings outlook is negative.